Ballarpur Industries : Indian Paper Behemoth Trading Below Book:: JPMorgan

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Ballarpur Industries Ltd. Overweight
BILT.BO, BILT IN
Indian Paper Behemoth Trading Below Book.
Reiterate Overweight


We resume coverage on BILT following lifting of restrictions related to BGPPL
deal. Sabah and Ballarpur pulp plant expansions are on track to get
commissioned in FY12. Recent paper price hikes taken should mitigate raw
material cost pressures. At 0.7x FY12E P/B, BILT is the cheapest paper stock
amongst its global peers and valuations should re-rate with improving ROE
profile as capacity utilization levels ramp up. Reiterate Overweight rating.
 Capacity expansion on track. Pulp capacity expansion is on track to increase
from current 462000 tons to 732000 tons by FY12E. Post this expansion, 90%
of BILT’s pulp requirement would be met internally. The expansion in pulp
capacity will de-risk BILT’s operations from the volatility of global pulp prices
and enhance margins. We estimate that post its capacity enhancement, its
blended cost of pulp would average about US$425-US$450/ton, which
compares favorably with the current landed price of pulp of US$700/ton.
 Key paper segments continue to grow rapidly: Management indicated that
the key segments to which they cater continue to rise much faster than overall
paper demand. Management indicated that coated paper is growing at 11%-12%
and Uncoated Mapilto paper is growing at 8%-9% vs. overall domestic paper
demand growth of 7% per annum
 Recent price hikes to mitigate rising pulp/materials cost. BILT margins
YTD have been below expectations on account of high imported pulp price.
BILT has recently hiked prices and curtailed lower-margin exports to boost
margins. While we expect EBITDA margins to expand by 120bps to 20.7% in
FY12E, we are reducing our EBITDA estimates by 6%/9% for FY11E/FY12E
to account for higher than expected raw material costs YTD.
 Trading at discount to book value. At 0.7x FY12E P/B, BILT is the cheapest
paper stock amongst its global peers. While we are cognizant of the low capital
return levels, we note that these are depressed due to recent capacity additions.
As capacity utilization ramps up and integration levels rise, we expect ROE to
increase from 10% in FY11 to 15% by FY14E. We maintain our price target of
Rs50, now rolled forward to Mar-12 based on 10x FY13E P/E, at 10% discount
to global paper manufacturers. Key risks include decline in paper prices,
demand slowdown in India, delay in capacity expansion plans and any adverse
changes to regulations.